DEDUCTIONS UNDER SECTION 10B OF INCOME TAX ACT, 1961 TO EXPORT FOR 100% EOU

[Mr. M. GOVINDARAJAN]

Newly established 100% EOU

Section 10B of the Income Tax Act, 1961 (‘Act’ for short) provides special provisions in respect of newly established 100% Export Oriented Undertakings. 

Section 10B(1) provides that subject to the provisions of this section, a deduction of such profits and gains as are derived by a 100% export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.

Where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years.   For the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software.

 No deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years and also to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.

Section 10B (2) provides that this section applies to any undertaking which fulfils all the following conditions, namely-

• it manufactures or produces any articles or things or computer software;
• it is not formed by the splitting up, or the reconstruction, of a business already in existence :
•  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation 2(iv) to Section 10B defines the expression ‘Export oriented unit’ as an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 and the rules made under that Act;

In ‘Income Tax Officer V. Mednautix Outsourcing Private Limited’ – 2017 (10) TMI 424 - ITAT AHMEDABAD  the assessee company was registered with Software Technology Parks of India, Gandhinagar as 100% Export oriented undertaking (‘EOU’ for short) for carrying on business of development and export of computer software and IT enabled services.  The assessee filed its return of income for the various assessment years wherein deductions of varied amounts have been claimed under section 10B of the Act.  The Assessing Officer denied the claim of deduction under section 10B against the profits and gains derived by 100% EOU from export of articles on the ground that the clause (iv) of Explanation 2 to Section 10B requires the assessee to be approved as 100% EOU by the Board appointed in that behalf.   The Assessing Officer noted that an approval granted by the Development Commissioner will be considered only valid if such approval is ultimately ratified by the Board of Approval.    The Assessing Officer observed that the assessee failed to produce any documents to support the approval of ratification by the Board of Approval for the purposes of eligibility of deduction under Section 10B of the Act.  The assessing Officer declined the claim of deduction of ₹ 34,94,279/- for the assessment year 2008 – 09 under  section 10B of the Act and also for other assessment years 2009 – 10 and 2010-11.

The assessee filed appeal against the order of the Assessing Officer.  The Commissioner (Appeals) upheld the action of the Assessing Officer towards denial of deduction under section 10B of the Act.   But he allowed the alternative claim of the assessee under section 10A of the Act since he was satisfied that the conditions prescribed for eligibility of deduction was satisfied.

The Revenue filed appeal against the order of Commissioner (Appeals) and the assessee filed cross objections for the same.    The Revenue submitted the following before the Tribunal-

• The Commissioner (Appeals) misdirected itself in law allowing the alternative claim of deduction under section 10A of the Act without giving any opportunity to the assessing officer to verify the terms and conditions specified for eligibility of the claim under section 10A of the Act;
• section 10A which was not claimed in the return of income, in place of its original claim of deduction under section 10B;
• Sections 10A and 10B has been deliberately segregated by the statute and conditions for claim of deductions are required to be satisfied independently which has not been done in the present case;
• The ratification of action of the Development Commissioner by the Board of Approval is necessary to avail of the deduction under section 10B of the Act;

The assessee pointed out to the Tribunal the copy of approval/ratification of the assessee’s unit as 100% EOU granted vide lr. dated 14.03.2013 and put forth the following arguments before the Tribunal-

• The assessee applied to the Development Commissioner to whom the powers have been delegated in this behalf;
• Subsequent ratification of the approval is the internal matter of the STPI authorities and the Central Government and the assessee has no role to play in the matter;
• The assessee has ultimately obtained the approval;
• Once the Board has ratified the approval granted by the competent authority of STPI, there is no warrant for denial of deduction under section10B of the Act as claimed;
• The case reopened under section 147 of the Act to deny the claim either allowed on a mere change of opinion is not sustainable in law;
• The Commissioner (Appeals) has erred in law and on facts of the case in not granting claim of deduction under section 10B of the Act;
• The Commissioner (Appeals) has erred in law and on facts of the case in confirming the action of the Assessing Officer in levying interest under sections 234A, 234B and 234C of the Act;
• The Commissioner (Appeals) has erred in law and on facts of the case in confirming the action of the Assessing Officer in initiating penalty proceedings under section 271(1)(c) of the Act;
• The appeal of the revenue is required to be dismissed and the cross objections of the assessee for eligibility of claim under section10B of the Act is to be upheld.

The Tribunal considered the arguments put forth by two sides.  The Tribunal observed by CBDT Instruction No. 2 of 2009, dated 09.03.2009 as amended, the powers vested with the Board have been recognized to be delegated to the Development Commissioner concerned to grant approvals to 100% EOU for the purposes of section 10B of the Act.  The Tribunal found force in the contention of the assessee that it has no control over the internal mechanism and procedure prescribed for ratification in appropriate cases by the Board for approval.  The Tribunal is also agreeable to the contention of the assessee that any delay in ratification of the action of the Development Commissioner will not bar the claim of deduction by the assessee altogether.   Once the permission granted by the Development Commissioner stands ratified, the ratification would relate back to the date of permission.    The Tribunal was of the view that the action of the Assessing Officer and the Commissioner (Appeals) in denying the claim of deduction under section 10B of the Act requires to be set aside as unsustainable in law.  The Tribunal held that the assessee is rightly eligible for claim of deduction under section 10B of the Act in the facts and circumstances of the case.